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Repo rate: meaning, effects and how bank exams ask it
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The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks for a short period, usually overnight, against government securities. "Repo" is short for repurchase agreement: the bank sells securities to the RBI and agrees to buy them back on a fixed date at a slightly higher price, and the difference is the interest. It is India's main policy rate, and it is set by the Monetary Policy Committee.
What happens when the repo rate changes
- Repo rate up: borrowing from the RBI becomes costlier, banks raise their own lending and deposit rates, loans and spending slow down, and inflation pressure eases.
- Repo rate down: funds become cheaper, EMIs on repo-linked loans fall, and credit and demand pick up.
Many floating-rate retail loans are tied straight to the repo rate through the external benchmark lending rate, so changes reach borrowers quickly.
Where it sits in the liquidity corridor
The repo rate is the middle of the liquidity adjustment facility corridor. The standing deposit facility rate is the floor and the marginal standing facility rate is the ceiling. Since April 2022 the corridor has been 25 basis points either side of repo (RBI Monetary Policy Statements, rbi.org.in), but the RBI can change that width.
Worked example (hypothetical numbers)
A bank is short of ₹500 crore for one night. It sells government securities worth that amount to the RBI and borrows at a hypothetical repo rate of 6.00% a year. The interest for one night is 500 crore × 6% ÷ 365 = about ₹0.082 crore, or roughly ₹8.2 lakh.
How bank exams ask about it
Expect direct stems such as "the rate at which RBI lends to banks against securities" or "which rate is the policy rate", and effect questions like "an increase in the repo rate will lead to...". The standard trap is mixing it up with the reverse repo rate and the bank rate. The latest figure turns up in current-affairs questions, so see how this fits the rest of banking awareness.
Where to find the latest rate
The current repo rate is on the home page of rbi.org.in and in the press release after each MPC meeting (the committee meets six times a year).
Frequently asked questions
Who decides the repo rate?
The six-member Monetary Policy Committee, chaired by the RBI Governor, decides it by majority vote and announces it after its bi-monthly meeting.
Is the repo rate the same as the bank rate?
No. Repo is short-term lending against securities. The bank rate is mainly a penal rate tied to the marginal standing facility rate.
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- Reverse repo rateReverse repo rate is what the RBI pays when it borrows from banks against government securities. Meaning, how it differs from repo and its status after SDF.
- Standing deposit facilityThe standing deposit facility lets banks park surplus funds with the RBI without collateral and sets the floor of the rate corridor. Meaning and exam facts.
- Marginal standing facilityThe marginal standing facility is the RBI window where banks borrow overnight in an emergency by dipping into their SLR holdings. Meaning, rate and exam facts.
- Liquidity adjustment facilityThe liquidity adjustment facility is the RBI's daily window for injecting or absorbing cash. Meaning, repo, SDF and MSF corridor, history and exam questions.
- Monetary Policy CommitteeThe Monetary Policy Committee is the six-member body that sets India's repo rate. Composition, appointment, voting, meetings, minutes and exam questions.
- EBLREBLR links loan rates to an external benchmark such as the repo rate. Meaning, benchmark options, spread, reset rules and difference from MCLR with example.
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